First steps to start-up

You have a great business idea and are convinced about its revenue generating abilities. The logical next step would be to get the business started. But how should your venture be structured? Look around. Not all organisations will have the words ‘limited' or ‘private limited' strung to their names. There would be several people making money from their backyards or still others who have jointly invested with friends and family members and share the profits with them.

While you mull over these options, you may also have to consider the accounting and legal compliance requirements that your choice commands. Here's a low down on the alternatives before you.

Plain and simple

Whether it is setting up tuition centres, providing bed and breakfast services, event planning or concierge services, more and more businesses today can be set up with very little initial investment. They can also be run from your own homes, helping you save on rent or real estate. In such cases and in others where the venture would run solely on your expertise, on a limited scale and for a small customer base, a proprietary form of organisation would suit best.

With little legal requirements and simple books of accounts it is also the easiest to form. However the disadvantage is that losses, even if it is over and beyond the capital you have invested, have to borne by you as the business does not have an identity of its own. Besides, limited capital, limited life and limited managerial ability are other constraints.

Join hands

These constraints become pronounced when you look at growing your business. Also, there are other organisations such as accounting or legal firms that require pooling of skills or say, a vehicle or consumer durables dealership business or small scale industries which may require pooling of finances. If you are convinced that you and your friends can pull it off together, you can form a partnership firm.

A partnership deed, specifying the mutual rights, powers and obligations is a must in this case. It is also advisable that you register the firm as the law is disadvantageous to unregistered firms when it comes to legal disputes either among the partners or with third parties. Besides, your firm will also be assessed a separate entity for tax purposes unlike the former where both your personal income and the business income is clubbed. However, the disadvantage of unlimited liability remains.

Legally, the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets of the firm are insufficient to meet its debts, the creditors can recover from the personal property of the individual partners. They are also responsible for the acts of other partners.

Superior form

A company right away overcomes the disabilities of the above two – it has an existence of its own under the law and the members are not personally liable for contracts or debts of the company. For businesses requiring bigger capital investments, this is the ideal structure. However, incorporating a company requires some paperwork.

Among the most important documents that you must file with the Registrar of Companies is the Memorandum of Association (MoA). It defines the powers of the company, lays down the area of operations and also regulates its relationship with the outside world. The Articles of Association (AoA), which defines the rules for internal management, is another important document. While this may already begin sounding arduous, the good news is that the Ministry of Corporate Affairs has gone tech-savvy. Under its ‘MCA-21' service, you can fulfil most of the legal requirements at the click of your mouse. The portal allows you to electronically get your Director Identification Number (DIN), reserve your company name online, submit scanned copies of the MoA and the AoA and to electronically complete other documentation requirements for obtaining the certificate of incorporation. You can also obtain a digital signature certificate online for use on e-documents. You will of course have to get your company's PAN and TAN numbers (which can also be done online) and register for VAT/service tax.

These three requirements may be common for other structures too. However, the legal and accounting compliance requirements once you get the company on its feet may still be cumbersome. Hence, your choice of the organisation style must be based on whether the size/scale of the business can justify it.

If not, you can also convert into a company at a later stage.

Limited Liability Partnerships

They may be the latest in the market, but LLPs are fast catching up. In only two years after being notified, about 4,580 LLPs have been registered in India as per the MCA website. This growing popularity can be attributed to the fact that it combines the best of both the partnership and company form of organizations.

Under the LLP structure, the liability of a partner is limited to his agreed contribution. No partner is liable on account of the independent or unauthorised acts of other partners.

So, unlike in a partnership business, individual partners are shielded form the joint liability created by another partner's misconduct. Also, the management-ownership divide in a company is absent in an LLP giving it more flexibility.

Compliance requirements are less too. Given the limited liability structure, this would encourage those with a risk appetite to pump in higher capital depending on the business requirements without being bogged down by whether they need to convert to a company.

This structure might be good for venture capital firms or others rendering professional services. Like for a company, the process of registration of an LLP can also be done online.

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